class 7 powerpoint Flashcards
what drives the magnitude of risk (beta) estimate among acquisitions?
Returns
the correlation of the frequency of observed new financing with market returns
not greater frequency of acquisitions
Selection bias
occurs when an empirical study limits itself to survivors and rules out the firms that ceased to exist
the Heckman correction
a procedure that addresses selection bias
what could a survival clause indicate?
that the representations made by the seller survives for a short period of time after the deal
what does the Delaware Chancery Court rule about the survival clause?
rules that the survival clause poses limitations on the ability of buyers to take legal action on the grounds of breach of contract
A representation and warranties insurance stands for what?
stands for a product that protects from losses stemming from survival clause (note: PE buyers may need to syndicate larger policies across several insurance firms)
Reverse breakup fees
could exist in a contract between a private seller and a PE buyer
the latter is induced to secure debt so as to complete the deal
PE funds are normally run by whom
by a general partner, the PE firm, and a number of investors and or limited partners
Most favoured nation agreements
special rights of information, larger funding, or kickstart initial investment
Committed capital
composed by lifetime fees and investment capital, is the money provided by the limited partners
Carried interest
earned from gains on the transactions conducted by the GP
A hurdle rate
stands for a threshold rate of return applied to the committed capital that must be met prior to any compensation paid to the GP (e.g., a typical 6% hurdle rate on a $100m investment entails $106m paid back to the limited partners)
Carry level
the percentage of the applicable profits (i.e., the post-hurdle rate profits) used to compute the GP’s earnings
(e.g., 2/20 is a 2% fixed rate and a 20% variable component of a 20% carry level)
Carry timing
GPs get some early profits
Clawback provisions
enable limited partners to recover from GPs part of losses stemming from poor performance via repayment of early paid profits to GPs
Monitoring and transaction fees
complete the variable compensation to GPs
Club deals or consortium deals
the stock acquisition by a PE fund of a target firm individually or via a combination with other PE firms
losing ground because a participating PE firm has to deal with the other owners
what does a joint bidding by PE consortiums cause?
fosters competition, not collusion
Strategic buyers
corporations which perceive a target firm as complementary to their overall business strategy
A sponsor-to-sponsor deal
takes place when one PE firm sells a previous acquisition to another PE firm
when does a public offering occur?
what does this depend on?
when a PE firm sponsors a public offering for its shares
such a path depends on the IPO market and equity market conditions
Dividend recapitalization
happens when newly acquired firms issue debt that serves as dividends to the PE fund investors
buyout leverage ratios have been trending upwards or downwards for the past years?
upwards
Private Equity Return
Characteristics
From the viewpoints of competition and maturity, performance persists during low competition periods,
–> this is hardly apparent in periods of high competition
